CALGARY, May 17 (Reuters) - Canadian Pacific Railway Ltd conceded defeat in a bitter proxy battle with New Yorkactivist shareholder William Ackman on Thursday, as top levelresignations cleared the way for a management overhaul at thecountry's second-biggest railroad.

Chief Executive Fred Green and Chairman John Cleghorn bothquit after a boardroom coup, a rarity in Canada's conservativecorporate culture.

Victory burnishes Ackman's reputation as a tenaciousactivist investor and paves the way for Hunter Harrison, thehard-hitting former chief executive of rival Canadian National, to take the controls at CP.

"We came in peace, and I'm delighted to say that we are atpeace once again," said Ackman to a crowd of about 300 peopleattending CP's very brief annual meeting in Calgary.

In a now-famous email to CP called "War and Peace," Ackmanin January repeated a request for board seats and a new CEO. Themessage, which heralded a frosty turn in relations, said: "Let'savoid having a border skirmish turn into a nuclear winter. Lifeis too short."

In an early morning announcement that represented a bigclimb down from its previous position, CP said Cleghorn, Greenand four other directors would not stand for re-election,opening the door to all seven nominees from Ackman's PershingSquare Capital Management to join its 16-member board.

The railroad had backed 55-year-old Green as CEO, arguingthat customers would not like to see a change in management.

"It would be naive for Canadian boards not to look at thisvery carefully," said Paul Taylor, Chief Investment Officer ofFundamental Equities at BMO Asset Management Inc and CPshareholder.

Ackman's win is one of several recent successes for activisthedge funds after proxy battles, including victories for DanielLoeb's Third Point LLC at Yahoo Inc, Sweden's CevianCapital at Cookson Group Plc, and Carl Icahn at oilrefiner CVR Energy Inc.

BIGGEST SHAREHOLDER

Pershing, which first revealed its CP investment in October,spent $1.4 billion for a 14.1 percent share of the company. Itwas CP's largest shareholder and the driving force for change.

Ackman said CP's industry-lagging performance can only beturned around under a new CEO, a view that found favor withinstitutional shareholders and the proxy firms that advise them.

Ackman's turnaround plan has hinged on Harrison, who iscredited with boosting efficiency at CN by cutting costs andpushing employees to make the trains run on time.

"We anticipate that a new CEO will be named within fourweeks of the board initiating the search, with Hunter Harrisonultimately selected as the successful candidate," RBC CapitalMarkets analyst Walter Spracklin said in a note.

The board named Stephen Tobias, an Ackman nominee to theboard and former Norfolk Southern Corp Chief OperatingOfficer, as interim CEO. Madeleine Paquin, an incumbent directorwho was re-elected, was named interim board chair.

After meeting for several hours, the new board also said ithad appointed a search committee to identify a permanent CEO.

Founded in the 1880's to link Canada from coast to coast, CPreinvented itself as a pure railroad a decade ago, spinning offoperations that included hotels, coal and shipping.

But its operating ratio, a key industry barometer thatmeasures efficiency, has lagged CN since the mid-1990s.

In the first quarter CP's operating ratio was 80.1 percent,while CN's was 66.2 percent. The lower the number, the betterthe railroad's performance.

"We've got to have two strong railroads in this country," hesaid. "All of us on the board believe Canadian Pacific has abright future and I am confident that the new board will moveforward in a constructive way on behalf of all stakeholders."

"CP does trade near the top of railroad valuations, but withmeaningful earnings growth potential, we see significant valuein the company's shares," he said. He raised his price target onCP shares to $93 from $81.

CP shares added 73 Canadian cents, or 1 percent, to C$76.59on Thursday afternoon, about 60 percent higher than on Sept. 22,the day before Ackman started buying shares in the railway.

But not everyone welcomed the news of a new CEO. BrianLancaster, a member of the Teamsters union who has worked at CPfor 30 years, said job security was a concern.

"We're not much better off with Hunter Harrison," he saidbefore the meeting started. "At CN, there was a lot ofdiscontent amongst employees. No one wants to be in fear oflosing his job."

CP's new management faces a possible showdown with one ofits unions as early as next week. A union representing about5,000 workers, including conductors and traffic controllers, isin a legal strike position from May 23.

BALLOT BOX DEFEAT

CP, which has put part of the blame for its lacklusteroperations on the steep Rocky Mountain grades its trains mustclimb and the region's frequent avalanches, insists it is on thecomeback trail.

It touted quarterly results in April as proof that itsimprovement plan was on track, but shareholders were not swayed,even as profit quadrupled and operations improved.

Ackman, who ruled out compromise, had won support fromseveral large shareholders and three proxy advisory firms, whoseadvice to large institutional investors typically influencesshareholder votes for or against management.

Ackman will not have control over the 16-member board, buthis seven-member slate provides the clout he needs to push for amanagement change.